In Blow to Finance Minister, Israel's High Court Quashes Tax on Owners of Three Homes

Tax is supposed to deter people from buying multiple homes as an investment and encourage them to sell ones they already own, thereby boosting supply of housing

Israeli Finance Minister Moshe Kahlon
Emil Salman

The High Court of Justice on Sunday struck down a law taxing owners of three or more homes on legislative-procedural grounds, forcing Finance Minister Moshe Kahlon to ask the Knesset Finance Committee to revote on the measure.

The decision was a big setback for Kahlon, who made the Law on Taxation of Multiple Assets, popularly known as the Third Apartment Tax, a centerpiece of his plan for lowering home prices. The tax is supposed to deter people from buying multiple homes as an investment and encourage them to sell the ones they already own, thereby boosting the supply of housing.

“I can say for certain that tens of thousands of young couples [first-time buyers] are disappointed today by this decision,” Kahlon said in a Facebook video. “The vow here and now [is] that we will continue the fight against investors. It can’t be that one person will own four, five and six houses and another doesn’t have one and can’t even dream of one.”

The court didn’t rule that the law itself was flawed, nor did it say the legislative process by which it was approved was entirely flawed. Rather, it pointed to “flaws” in the way the tax was legislated December 15 in an overnight session of the Knesset Finance Committee.

“What happened that night shouldn’t have occurred,” Chief Justice Miram Noar said in a supplement to an opinion written mainly by Justice Noam Sohlberg.

As a result, the court said the proposed law would have to go back to the Knesset Finance Committee – where the coalition has a majority– to deliberations and a vote and then go to a second and third vote in the full Knesset.

Knesset sources said the legislation would probably not reach the full Knesset until the winter session, meaning a long delay in the best of circumstances for a law that was due to go into effect on January 1.

MK David Bitan (Likud), chairman of the coalition, said recently that Prime Minister Benjamin Netanyahu had instructed him to ensure a Knesset majority for the tax. With the prime minister faced with multiple police investigations, he isn’t interested in conflict within the coalition.

But inside the Likud party, there were voices on Sunday opposed to the law. “It’s a bad law that never would have passed if not for the pressure [to pass] the budget vote,” said MK Yoav Kish. “Now that it’s been rescinded by the High Court because of an overly hasty legislative process, there doesn’t seem to be any reason to debate it again.”

Moshe Gafni (United Torah Judaism), chairman of the Knesset Finance Committee, also cast doubt about the law.

“Kahlon has approached me [about the law], but we need to study the High Court’s decision. That seems to be what we have to do,” Gafni said. “Already on that night, December 15, 2016, I had asked the finance minister to debate it in the committee. I’m against the law. It won’t do anything. It’s not entirely constitutional.”

The law, as it was passed after some revisions, calls for a 1% tax on people who own three or more residential properties up to a maximum of 18,000 shekels (almost $5,000) annually per house. The Finance Ministry estimates that more than 50,000 Israelis own three or more properties, or a total of some 180,000 houses and apartments nationwide.

Although the tax was never imposed, observers said that the threat – along with other measures taken by Kahlon to deter investors – had an effect over the past year, causing investors to sell off properties and stop buying.

Sohlberg said the court had no choice but to rule on the matter, despite hesitations about interfering with the work of the Knesset, because of the way the law was passed. Debate began in the finance committee without opposition lawmakers, who refused to participate; the debate was short and Gafni himself left before the vote was held. The debate was conducted when lawmakers were also under pressure to approve the 2017-18 budget.